Investing with debt - Opinions please!

[DarkRed]

I have been an avid watcher of ST over the past year and only just starting to post. I have been learning some of the ropes with the sharemarket since I was 17 and started investing with CEN being my first purchase.

I am now 22 and after some advice from the seasoned pros please!

My situation now has changed with two rentals properties (80% financed) and between them they have a secured 30k flexi loan at 6% floating IR.
Over the years I have increased my share portfolio to include BHP CEN RYM and NZO funded by cash. Also held PRC : S

So my question: Do I start investing using my equity from my rental properties, I have invested 10k of it currently but should I expose myself more? should I be aiming for yields exceeding the IR or taking on higher risk and aiming for capital gains? NZX or ASX? I am young so I don't mind talking risks provided I can understand them.

If someone has some spare time I would love to hear stories from your investing experience. I live in Hamilton but often frequent Auckland and Wellington. I will shout the first few beers if anyone is keen!

[shasta]

I have been an avid watcher of ST over the past year and only just starting to post. I have been learning some of the ropes with the sharemarket since I was 17 and started investing with CEN being my first purchase.

I am now 22 and after some advice from the seasoned pros please!

My situation now has changed with two rentals properties (80% financed) and between them they have a secured 30k flexi loan at 6% floating IR.
Over the years I have increased my share portfolio to include BHP CEN RYM and NZO funded by cash. Also held PRC : S

So my question: Do I start investing using my equity from my rental properties, I have invested 10k of it currently but should I expose myself more? should I be aiming for yields exceeding the IR or taking on higher risk and aiming for capital gains? NZX or ASX? I am young so I don't mind talking risks provided I can understand them.

If someone has some spare time I would love to hear stories from your investing experience. I live in Hamilton but often frequent Auckland and Wellington. I will shout the first few beers if anyone is keen!

You have done well to get to where you are at, especially at just 22.

Borrowing to buy property & then leveraging the debt to buy shares is at the higher end of the risk scale, but clearly you have the tolerance for it.

Having access to "cheap" capital @ 6% is better than what the margin lenders will offer, so obtaining returns higher than this shouldnt be too difficult

A few questions for you to ponder?

1. Given your income level & the costs associated with the properties, can you invest in shares without having to sell up to fund living/property costs?

2. What risk tolerance do you have, would losing 50% cause problems, what kind of returns are you after, are you investing for the long term? (ie, do you need dividend income to repay the loans?) NB, Using the loan to invest in shares may make the interest deductible for tax purposes, do you have someone looking after the accounting side of the properties for you?

3. What sectors/areas (if any) are you interested in, or may know more than the average punter thru your choosen field of work?

4. Do you have any understanding of Technical analysis, & able to read/understand charts? (Essential for those wanting to "trade")

5. What is your current personal situation, do you plan to do an OE, already have a partner/married/kids etc (these all cost $$$)

6. I would urge you to try & attend a casual Sharetrader Meeting in Auckland, Christchurch etc - there are a vast number of posters who can help you out at these

When im back working & sorted, i'll start up the Wellington catch ups again (these are usually every 3 months or so)

7. Are you already in the Kiwisaver scheme, something to think about, if not already

8. Do you have short/mid/long term goals already set, ie, what got you thinking about getting into shares, always helps to have a target to shoot for

Lastly, navigate around this site & see what other people have asked previously on the newbie threads, plenty of wisedom & help around, as there are some very astute investors/traders on Sharetrader

[percy]

Darkred.
I am sure meeting others would be help to you.I know in CH_CH both selena and denpal are property people with the sharemarket as a hobbie.Successful hobbie.
You have a lot of debt with your rental properties.I would think it would give you greater finnancial independance being debt free with your shares.My reason for saying this is when things go wrong,everything goes wrong.One of your tennants leaves owning 3 months rent,you need to spend money on your rental,and at time your shares are down.**** happens.! and it does.I would think you would be best to stay liquid with your shares ,as you may want to buy another property,need funds in a hurry etc.I think you are showing good judgement with your shares.Do not worry a lot of old hands got caught out with PRC.Lastly shasta always gives good advice.

[DarkRed]

Shasta,
Thank you for taking the time to reply to my thread. I have seen your name pop up a lot on these forums, would love to come along to one of the catch ups. My Girlfriend is based in Welington so im sure a visit down to the windy city would be easy.

I have pondered a few of these questions. So here is where I am at in more detail.

1. Funding investment - In my current position I have 2k per month free investment capital. A small amount of this gets consumed by the rental properties to cover my shortfall (around $300 a month). On the safe side I would have $1500 per month of investment capital.

2. Risk Tolerance - I could percivably lose 50% of my investment and still not largly effect cash flows (would make no difference to my personal cash). Risk profile = high. As for accounts I manage a cash book for my rentals and investments that is handed over to my accountant at the end of the year.

3. Areas of interest - I currently work in the Electricity Generation industry hence my holding in CEN. Interested in this area and the larger sector. Mining and Energy has been my latest watchlist, still learning heaps here!

4. TA - My understanding is more FA at this stage. I have read The Warren Buffet Way and getting through The Intellegent Investor at the moment. Have recently opened a CMC Markets CFD account purly to get a better understanding of TA. They offer a free one day seminar in Auk and heaps of learning material on their website with good charting software but still a real novice! Any other advice here?

5. Personal Situ - Currently have a girlfriend and planing to do my OE next year. Heading to London during the 2012 olympics. Hoping to keep my cash flows similar to current with slightly higer servicing costs with the rental properties (self managed at present).

7. Been in Kiwisaver since its inception maybe 13k now. I see this more as an insurance premium if I make a few big mistakes I will have some money when I can't work...hopefully not need tho!

8. Have short/mid/long term goals. Long term is to be financially retired by 35. Get into commercial property at some stage and try my entrpreneural side with some kiwi business ventures. Wouldnt mind giving Richard Branson a run for his money...thats the dream.

Sorry if this seems long winded. I would love to meet some of the seasoned pros so if there is an event in Wellington I will be there.
Currently don't know many people that are into investing so makes it hard to bounce ideas of others...

[shasta]

Shasta,
Thank you for taking the time to reply to my thread. I have seen your name pop up a lot on these forums, would love to come along to one of the catch ups. My Girlfriend is based in Welington so im sure a visit down to the windy city would be easy.

I have pondered a few of these questions. So here is where I am at in more detail.

1. Funding investment - In my current position I have 2k per month free investment capital. A small amount of this gets consumed by the rental properties to cover my shortfall (around $300 a month). On the safe side I would have $1500 per month of investment capital.

2. Risk Tolerance - I could percivably lose 50% of my investment and still not largly effect cash flows (would make no difference to my personal cash). Risk profile = high. As for accounts I manage a cash book for my rentals and investments that is handed over to my accountant at the end of the year.

3. Areas of interest - I currently work in the Electricity Generation industry hence my holding in CEN. Interested in this area and the larger sector. Mining and Energy has been my latest watchlist, still learning heaps here!

4. TA - My understanding is more FA at this stage. I have read The Warren Buffet Way and getting through The Intellegent Investor at the moment. Have recently opened a CMC Markets CFD account purly to get a better understanding of TA. They offer a free one day seminar in Auk and heaps of learning material on their website with good charting software but still a real novice! Any other advice here?

5. Personal Situ - Currently have a girlfriend and planing to do my OE next year. Heading to London during the 2012 olympics. Hoping to keep my cash flows similar to current with slightly higer servicing costs with the rental properties (self managed at present).

7. Been in Kiwisaver since its inception maybe 13k now. I see this more as an insurance premium if I make a few big mistakes I will have some money when I can't work...hopefully not need tho!

8. Have short/mid/long term goals. Long term is to be financially retired by 35. Get into commercial property at some stage and try my entrpreneural side with some kiwi business ventures. Wouldnt mind giving Richard Branson a run for his money...thats the dream.

Sorry if this seems long winded. I would love to meet some of the seasoned pros so if there is an event in Wellington I will be there.
Currently don't know many people that are into investing so makes it hard to bounce ideas of others...

Re #1 = Are you wanting to sell your current holdings seeking better returns, or add to them thru regular "dollar cost averaging?"

#2 - You seem switched on, so risk isn't an issue, i also look for higher rewards thru taking on higher risk, but my style is purely FA & i look for low EV style companies that the market hasnt cottoned onto yet.

#3 - Energy is such a large investment area, with oil, gas, unconventional gas, geothermal, coal, uranium + the utilities - plenty of stocks in this area

#4 TA wise there are many threads on here with info on learning sites etc & some very good chartist, there are also plenty of fundies who will post there analysis

#5 How are you funding the OE, what i mean is assuming the shares & properties are left ticking away at the rates you mentioned & those funds are not used, ie a long term plan, or will you simply cease the ongoing funding whilst travelling? seems you have your affairs covered, good stuff

#7 - Kiwisaver comment was just a thought i had, may as well take the free money, im going to just put in 2% in my next role

#8 Great you have such goals, i recommend you get/read Martin Hawes book, "Get Rich, Stay Rich" (& become financially free), otherwise next time you're in Wellington, let me know & you can have my copy.

Be good to meet you at a future Wellington Sharetrader event, there are some great people here in the Nations Capital!

[RRR]

Well done DR-use leverage in this low interest rate environment. It is very rare in the investment world that the dividend yield is higher than the bank interest rate-so use it. For me, when using leverage cash flow is very important(dividends/rents) and I am more conservative when investing using leverage. Most companies now offer DRP at a discount and I gladly take it. Some people dont like it and they are often mature investors who dont want to reinvest dividends.

[DarkRed]

Darkred.
I am sure meeting others would be help to you.I know in CH_CH both selena and denpal are property people with the sharemarket as a hobbie.Successful hobbie.
You have a lot of debt with your rental properties.I would think it would give you greater finnancial independance being debt free with your shares.My reason for saying this is when things go wrong,everything goes wrong.One of your tennants leaves owning 3 months rent,you need to spend money on your rental,and at time your shares are down.**** happens.! and it does.I would think you would be best to stay liquid with your shares ,as you may want to buy another property,need funds in a hurry etc.I think you are showing good judgement with your shares.Do not worry a lot of old hands got caught out with PRC.Lastly shasta always gives good advice.

Thanks for the input Percy. I am making sure I keep a certain amount of cash available for if i'm faced with problems like you are talking about. I have the 30k Flexi loan of which 10k is already invested so 20k left. I am thinking of investing another 10k and keeping 10 for the situations you described. Each month I will be putting in 2k to reduce the debt.
I am not looking at purchasing another house in the near future so want to get this money working somewhere else...

Still to risky and over exposed if "S*** Happens"?

[DarkRed]

Re #1 = Are you wanting to sell your current holdings seeking better returns, or add to them thru regular "dollar cost averaging?"

#2 - You seem switched on, so risk isn't an issue, i also look for higher rewards thru taking on higher risk, but my style is purely FA & i look for low EV style companies that the market hasnt cottoned onto yet.

#3 - Energy is such a large investment area, with oil, gas, unconventional gas, geothermal, coal, uranium + the utilities - plenty of stocks in this area

#4 TA wise there are many threads on here with info on learning sites etc & some very good chartist, there are also plenty of fundies who will post there analysis

#5 How are you funding the OE, what i mean is assuming the shares & properties are left ticking away at the rates you mentioned & those funds are not used, ie a long term plan, or will you simply cease the ongoing funding whilst travelling? seems you have your affairs covered, good stuff

#7 - Kiwisaver comment was just a thought i had, may as well take the free money, im going to just put in 2% in my next role

#8 Great you have such goals, i recommend you get/read Martin Hawes book, "Get Rich, Stay Rich" (& become financially free), otherwise next time you're in Wellington, let me know & you can have my copy.

Be good to meet you at a future Wellington Sharetrader event, there are some great people here in the Nations Capital!

Shasta thanks again for your posts. I have spent some time looking at other threads with advice you have given other novices like me.

#1 At this stage planing on holding my current position and potentially adding to them. Looking at increasing my holding in RYM, currently a smaller portion of my portfolio. In a post I mentioned i'm looking at investing another 10k. I am thinking two parcels of 5K. What would you recommend to be efficient sized parcels to Buy given the small capital available.

#5 The OE... This is the big one. My current idea for funding the OE is probably going to get beaten up. I am planing on reducing my debt before I go so I have 20k of the flexi available as a safety net for the properties and to fund the OE if I really get stuck (not my preferred option). The primary funding will be from my annual bonus at work, my accrued annual leave as a payout and selling my car. Should land me with 10-13 to play with. OE is going to be a working one!

#8 I have added the book to my Fishpond watchlist! Thanks for offer tho.

Looking forward to meeting people at the ST events. Keep me posted.

[DarkRed]

At any one point in time this is generally true. But its what I'd call faulty conventional wisdom. A platitude spouted by wise old folk who have paid off their mortgages over 25 years and think they're financial geniuses. (RRR, not suggesting you're one!)

Here's my example using a real life example (which is shared by other ST'ers) from the last few years.

Between apr, may and jun of 2009 - the height of the GFC - bought heaps of NPX. All of it with borrowed money at about 6%. Average price about 1.50 (to keeps the mathes easy). Now, in 2011 they are paying a dividend of 21c per share - and this has been rising steadily since I bought and is likely to continue. Using 21c per share thats a yeild on a 1.50 share of 14% ... So I get to pocket the difference 14% - 6% = 8% ... So ignoring capital gain NPX is paying me 8% ... This is jam ... the gold is the capital gain.

I could sell about half my holdings in NPX and the remainder would essentially have cost me nothing. Hmmm ... How do you calculate a yield on a stock which cost you nothing and is paying out 21 cents per annum?

A more recent example is NZR ... which is still unfolding ... While everyone's been commenting on the rising shareprice, the yield of this stock is generally amazing. If memory serves, back before the GFC and various NZR cyclical factors, they were one of the best yielding stocks on the NZX. Often around the 8% mark (sometime as high as 10%) and fully valued at that level about $6.50 ish.

NZR turned the corner at about 3.20 ... back in July 2010 (at least this was when I started buying) ... Belgie was in again. Again 100% borrowed money. ... Dividends will be coming back on stream and if NZR payout dividends in the same range as previously my yield should be way above cost ... and the capital gain should be pretty good too. Not gloating just yet but I pretty sure I'll be proven right. How high will my yeild be on a share I bought for around 3.50, and is now about 5.00? Lets say the market is pricing in a future yeild of 8%. On a $5 share that'd be about 40cents. 40 cents on a 3.50 share is a yield of 11.5%.

Okay, "they're the success stories", I hear you all yell. What happens is it goes the other way? And there, my friends, is the other bit of "faulty conventional wisdom". Its not anything like as bad as you think .... so long as you are disciplined about cutting your losses!

Belgarion,
Thanks for the examples. Any advice on sectors or specific company's worth looking into for opportunities like you have mentioned? Hopefully this isn't to cheeky a question...or is that a hint that NZR is worth looking at.

[POSSUM THE CAT]

DarkRed As A suggestion make your mortgages work harder for you if possible buy shares in the bank issuing them. There is with some of them some shareholder perks as well.